This document provides an overview of topics covered in a lecture on mainstream economics, including: - The concept of rational economic man and how it forms the basis of mainstream economic theories. - Key assumptions in mainstream economics around self-interest, utility, and marginal utility. - The concept of Pareto optimality and how it relates to efficiency. - It also discusses Islamic economic thinkers during the alleged "Great Gap" in economic thought between ancient Greece and the European Enlightenment, including their contributions to ideas around markets, ethics, and regulation. Specifically, it outlines the works and ideas of Ghazali, Dimishqi, Ibn Taimiyah, Kay Kavus, and Ibn Tuf

1. SOSC 2330: Lecture Two
September 26, 2022
The Individual, Governments and
Markets

2. Recording One
SLIDES 5 - 15
Mainstream economics
Self-love (self-interest)
Utility
The Marginalist Revolution / Marginal Utility

3. Recording Two
SLIDES 16 - 25
Rational Economic Man (homo economicus)
Pareto Optimality
Efficiency / Externalities

4. Recording Three
SLIDES 26 -38
Schumpeter’s ‘Great Gap’
Orientalism
The Enlightenment and the Subject
Ibn Tufayl: Hayy Ibn Yaqsan
Mirrors for princes
Kay Kavus: Qabus Nameh
Dimishqi and price theory
Ghazali and economic ethics
Ibn Taimiyah and market regulation

5. Mainstream Economics
Mainstream economics can be defined as:
“the dominant form of economic reasoning
today. It involves a set of ideas, methods and
conceptions of human nature that guide
economists. These ideas constitute an
orthodoxy, or core set of principles, which form
the basis of mainstream economics” (Scott and
Peacock, 164).

6. Orthodox / Heterodox
Orthodox
Ortho + Doxa = orthodox
(straight, right) (opinion)
Heterodox
Heteros + Doxa =heterodox
(other) (opinion)

7. The Invisible Hand
Adam Smith 1723 – 1790
He generally, indeed, neither intends to
promote the public interest, nor knows
how much he is promoting it. By
preferring the support of domestic to
that of foreign industry, he intends
only his own security; and by directing
that industry in such a manner as its
produce may be of the greatest value, he intends only his own
gain, and he is in this, as in many other cases, led by an invisible
hand to promote an end which was no part of his intention. Nor
is it always the worse for the society that it was no part of it. By
pursuing his own interest he frequently promotes that of the
society more effectually than when he really intends to
promote it.
The Wealth of Nations, IV.2.9

8. self-love (self-interest)
“It is not from the benevolence of the butcher,
the brewer or the baker…”
Implications:
1) People respond to incentives;
2) People are motivated by self-interest rather
than selflessness;
3) Most likely to cooperate when it is to each
person’s advantage for them to do so.

9. The notion of “utility”
Jeremy Bentham
1748 - 1832
• Bentham argued that humans have two
masters: pleasure and pain.
• All that we do can be rationally
calculated in order to promote the
achievement of pleasure and the
avoidance of pain.
• We can measure actions as right or
wrong on the basis of their effect (the
end, not the means)

10. Universal Selflessness
• But for Bentham utility was part of a bigger
moral picture. As seekers of pleasure and
avoiders of pain humans should act in the best
interest of the common good – seeking the
greatest good for the greatest number in
society:
“…an action may be said to be conformable to the
principle of utility (meaning with respect to the
community at large) when the tendency it has to
augment the happiness of the community is greater
than any it has to diminish it” (Bentham, cited in
Scott and Peacock, 166).

11. Utility as Behavioural Postulate
For Bentham utility was a moral imperative, but in
economics it is a behavioural postulate (a truth
claim about the way in which people behave):
“Utility maximization, in mainstream economics, is
a behavioural postulate. According to this
postulate, people are self-interested and they
pursue their self-interest in a calculating and
rational way” (168).

12. Utility as Behavioural Postulate
“..assuming that most human beings are rational
economic beings who possess the attributes of
homo economicus makes it easier to fit them into
mathematical models. […] most mainstream
economists assume that human beings think of
their advantage and self-interest in terms of
quantity and price, and since price can be
measured, we can then start to think about
economics in mathematical terms” (167).

13. The Marginalist Revolution
“The law of supply and demand regulates all
these exchanges of commodities just as the law
of universal gravitation regulates the
movements of all celestial bodies. The system of
the economic universe reveals itself, at last, in all
its grandeur and complexity: a system at once
vast and simple, which, for sheer beauty,
resembles the astronomic universe” (Léon
Walras, 1874, cited in Scott and Peacock 169).

14. Marginal Utility
“An idea which helps economists explain how
individuals make decisions about what to buy or
sell at different prices” (167).
The theory of the ‘last want,’ which assumes
that we ‘reason at the margin’ or, reason by
“determining the subsequent value of each good
as it satisfies our utility” (168).

15. Consumers as Cisterns
From Irving Fisher’s Mathematical Investigations, 1892

16. Who is Homo Economicus?
Homo economicus, or rational economic man, is
a figure (a hypothetical character) used by
classical economists (18th and 19th century) to
describe the way that human beings act in
economic contexts.
This figure serves as the basis of most economic
theories (even today).

17. Robinson Crusoe
“Who is Homo Economicus? Originally he was a
fiction invented by economists. Their model was
a character from the novel Robinson Crusoe by
Daniel Defoe, imagined as a metaphor for an
Englishman discovering a virgin land (in all
senses of the term – with no inhabitants, no
past, on the American model) and leading a
‘rational’ life. […] In all circumstances Robinson
Crusoe tried to maximize is wellbeing, like a firm
that maximizes its profits” (Cohen, 15).

18. Robinson Crusoe

19. “Rational Economic Man”
The underlying presuppositions:
“A free and rational individual (assumed to be a
man) who
• Pursues his own self-interest,
• Knows what his self-interest is, and
• Can measure his own self-interest in economic
terms (e.g. in terms of price or cost) and act
accordingly” (166).

20. Formal Equality
“When we insist on formal equality, we can do
so only by drawing a very narrow picture of
what it is to be a legal subject, the universal
and formally defined actor of civil society”
(Boyle, 1991)
• The legal subject granted “formal equality” is
a subject very similar to “rational economic
man” – a universal and self-determined actor
who is not fundamentally constrained by her
social and cultural context.

21. Pareto Optimality
Vilfredo Pareto
1848 - 1923
• Pareto optimal allocation
(or Pareto Efficiency): “we
cannot reallocate resources
to improve one person’s
welfare without impairing at
least one other person’s
welfare”
• Pareto improvement:
“where a change in resource
allocation is preferred by one
or more […] and opposed by
no one” (Rhoads, 63)

22. The Individual and Preferences
Microeconomic Assumptions about Preference:
1) Completeness: for any two options, x and y, a
given consumer can rank x and y such that
either x is preferred to y, or y is preferred to
x, or the two are equally preferred.
2) Transitivity: If, for a given consumer, option x
is preferred to option y, and option y is
preferred to option z, then, by transitivity x is
preferred to option z.
Scott and Peacock, 172

23. Free competition
Free competition implies several things:
- Individuals with equality of right in the market
place
- Absence of barriers to trade
- Absence of monopolies
- Access to information (through price)

24. How do we characterize markets?
(mainstream vision)
1) Market relations are impersonal
2) The individual is free to pursue her advantage
3) Goods traded on the market are exclusive and
rivals in consumption
4) The market is purely want-regarding (a focus on
taste and money as opposed to the intensity of
needs)
5) Dissatisfaction is expressed with exit not with
voice
From “Markets and Ethical Values” (97-8)

25. Key Terms from the mainstream
Efficiencies: “Free markets with their flexible prices provide
more than the right information. They also give people an
incentive to act on it. Economists find that the desire for
wealth is a sufficiently common goal to ensure that resources
will shift when financial incentives do” (Rhoads, 65).
(In other words: firms that succeed are firms that respond to
the demands of the consumer. The consumer makes her
demand known by “voting with her dollar.” )
Externalities: “Externalities are effects on third parties that
are not transmitted through the price system and that arise as
an incidental by-product of another person’s or firm’s activity”
(Rhoads, 67).

26. The “Great Gap” Theory
Plato and Aristotle
(~428BC- ~348BC) and (384BC – 322BC)

The GAP
Dark Ages

St. Thomas Aquinas
1225-1274
Famous historian of economic thought, Joseph
Schumpeter, argued that there was a “great gap” in
economic analysis.
Gap between roughly 300 BC – 1200 AD
“A blind spot” in historical accounts (Ghazanfar)

27. The “Great Gap” Theory Compounded
Plato and Aristotle
(~428BC- ~348BC) and (384BC – 322BC)

The GAP
Dark Ages

Adam Smith
1723-1790
Most histories of economic thought do not seriously
engage with economic thinkers until the Physiocrats
(France, 18th C), and Adam Smith (UK, 18th C)
Francois Quesnay
1694-1774

28. Silence on Muslim Scholarship
“Yassine Essid notes that ‘it is very curious that
historians of economic thought, usually so quick
to find a deceased precursor for every theorist,
have remained silent about the contributions of
Arab-Muslim authors’” (Hosseini, 89).

29. Explaining the Gap: Orientalism
While there are many reasons for gaps in European accounts
of knowledge, one that pertains to the gap here is what
Edward Said describes as orientalism:
“The Orient that appears in Orientalism, then, is a system of
representations framed by a whole set of forces that brought
the Orient into Western learning, Western consciousness,
and later, Western empire. ... The Orient is the stage on
which the whole East is confined. On this stage will appear
the figures whose role it is to represent the larger whole
from which they emanate. The Orient then seems to be, not
an unlimited extension beyond the familiar European world,
but rather a closed field, a theatrical stage affixed to Europe”
(Edward Said, Orientalism)

30. Filling out the Map

31. Filling out the Gap
Ghazali
Persian Sunni
Theologian
(1058-1111) Dimashqi
Syrian Merchant
(1256-1327)
Abbasid rule in Baghdad
(750-1258)
‘Mirrors for Princes’
Kay Kavus (Keikavus)
Persian Prince
Wrote Qabus Nameh
(1021 – 1087)
Ibn Taimiyah
Syrian Sunni Theologian
(1263-1328)
Ibn Tufayl
Spain-Morocco
(1105-1185)

32. Importance of Influence on the
European Enlightenment
An Image of Hayy Ibn Yaqsan,
the protagonist of a story by
Ibn Tufayl (1105-1185) about
auto-didacticism (self-
learning) that served as an
important, and often un-
credited, influence to the
European Enlightenment.
Some of the most crucial ideas of the European
Enlightenment are about the individual subject and
his capacity to know and learn. Many of these ideas
were already present in medieval Spain, specifically in
the work of Ibn Tufayl who was, in the early 12th
Century, engaging with the ancient Greeks and with
other Islamic philosophers and theologians.
Key Concepts (both of the Enlightenment and of Ibn
Tufayl’s work):
• Subject capable of learning without following
dogma, custom, or being taught (auto-didacticism)
• Importance of experimentation (development of
anatomical knowledge through dissection)
• Knowledge of the spiritual through metaphysics

33. Mirrors for Princes
“During the Abbasid rule in Baghdad (750-1258),
“mirrors for princes” emerged to explain the
practical aspects of politics, economics, and
other social institutions. In contrast to Islamic
jurists and philosophers, the authors of ‘mirrors’
were not concerned with theoretical
considerations. Rather, the aim was to advise
rulers, their ministers, and even would-be
merchants on how to best conduct their affairs”
(Hosseini 98).

34. Kay Kavus: Qabus Nameh
Kavus (1021 – 1087) developed economic analysis
that is ‘positivistic’ and ‘impersonal’ in nature.
Key ideas:
1) Wealth provides man with utility, and should be
maximized.
2) Legal frameworks are necessary for a well-
functioning market (i.e. contracts)
3) Suppliers must be cost-minimizers, and large
scale commerce is more efficient

35. Dimishqi and price theory
Dimishqi (1256-1327) was a merchant from
Damascus, and was deeply influenced by Greek
thinking.
Key Ideas:
1) Approves of wealth for its own sake, and sees
wealthy merchants playing a positive role in
society.
2) Adhered to the ethic of the golden mean, “the
median price is that price which brings profit to
the market without harming the community”
(94).

36. Ghazali and economic ethics
Human beings have a natural propensity toward the
accumulation of wealth:
“Man loves to accumulate wealth and possessions
of all kinds of property. If he has two valleys of gold,
he would want to have a third. Man has high
aspirations. He always thinks that the wealth which
is enough now may not last, or might get ruined
and then he would need more. He tries to
overcome these fears by further accumulation. But
such fears do not end – even if he has all the
possessions of the world” (Hosseini 96) (passage
originally quoted in Ghazanfar and Islahi 1990, 384-
5).

37. Ghazali and economic ethics
In order to counteract our natural tendencies, we
should engage in constraint when trading with
others.
Key ethical ideas include:
- Economic activity is not more important than
spiritual activity
- Men ought to realize that the division of labour
and cooperation make our lives possible
- Those engaged in trade should not be unduly
eager to make a profit
- Men should be honest in their dealings, and avoid
those of doubtful natures

38. Ibn Taimiyah and market regulation
“Although Ibn Taimiyah was an advocate of free
markets, he was by no means a believer in an
absolute form of an ‘invisible hand’” (104).
Acceptable forms of market regulation included:
- Price controls in times of emergency (war,
famine, etc.)
- State intervention in cases of price discrimination
- Market supervision by the muhtasib, “the
economic morality policeman”

39. Next Week
Required Reading:
Coase: “The Problem of Social Cost”
Supplementary Reading:
Cooter & Rubinfield: “Economic Analysis of Legal
Disputes and Their Resolution”